Spendthrift trusts are a type of irrevocable trust in which the grantor seeks to leave property or assets to a beneficiary, under the terms they outline, by which the beneficiary cannot alter, because they have no legal claim to the trust property. An irrevocable trust is a type of trust by which the beneficiary cannot modify the terms of the trust without the first obtaining the permission of the grantor.
Irrevocable trusts allow the grantor to create this trust document in which they transfer their rights to the property into the trust and the trustee, a third party manager of the trust, now technically holds legal title, until the trust allows for vestment in the beneficiaries. Beneficiaries are not the only ones who lack control in these trust situations; in an irrevocable trust, once it is created, the grantor cannot undo the trust to obtain title to the property without first getting the consent of the trustee and beneficiaries.
When To Use a Spendthrift Trust
Irrevocable trusts have many purposes, including for the numerous tax benefits and exemptions, to prevent beneficiaries from misusing their inheritance, to gift assets or remove them but still retain income from the assets, and to avoid the estate tax upon death for a life insurance policy. The trustee has a huge responsibility in this role, they are to make distributions and determinations regarding the trust property and the beneficiary’s entitlement to it at certain points.
Many grantors elect to have a banking institution or professional named as trustee due to their impartial nature and financial background, as well as their commitment to the grantor. The trustee only provides trust principal to the beneficiary according to the wishes of the grantor.
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For a spendthrift trust specifically, a grantor may want to establish a spendthrift trust if they are concerned about their beneficiaries blowing through their inheritance quickly and irresponsibly, or to protect the beneficiaries if the beneficiaries have creditors who may seek to reach their trust inheritance. Creditors cannot access the trust because the beneficiary also cannot access the trust.
While the nature of this type of trust can be controversial because it acknowledges a general mistrust of the beneficiary’s ability to manage trust assets, the grantor is simply seeking to ensure the money they have worked to earn or manage will not be squandered away, but will benefit the beneficiary in their future endeavors.